Skip to main content

Posts

Showing posts from September, 2008

The payback for short termism

As the last of the building-society-turned-banks loses its independence it seems only right to ask whether the policy of demutualisation pursued by the Conservatives when last in office was anything more than an expensive failure. It is certainly interesting to note the symmetry between that policy an the other great Conservative housing policy- "the right to buy", i.e. that those living in Council owned social housing could buy their homes at a big discount. Indeed it is pretty clear that this policy lies at the root of the British obsession with property. The move from right-to-buy to buy-to-let seems almost inevitable given the way in which the banking system of the UK was deregulated.

It was a classic case of short-termism. The prices that Council tenants paid did not reflect the sunk costs that the state had put into the social housing in the Post Second World War period and the prices were therefore highly attractive- the incentive to buy was substantial. Likewise in th…

Avalanche

Monday 29th September 2008 may go into history as the Black Monday of this swing of the economic cycle.
The failure of the US Congress to agree the bail out proposed by Treasury secretary Hank Paulson was quite clearly unexpected by the markets an the immediate and dramatic sell-off that followed was astonishing.
Britain and the US remain in the eye of the storm, yet the UK is following a consistent policy. The breakdown of the US political consensus leaves policy makers with no clear path as to what to do next. Sterling has its worst day's trading in nearly fifty years.
Six banks have essentially gone under today: B&B in the UK, Glitnir in Iceland, Fortis in BeNeLux, Washington Mutual and Wachovia in the US, and Hypo Real in Germany.
As I write the NASDAQ is off nearly 10% and most global markets are off nearly as much.
This is now looking like a systemic breakdown.

Now I'm scared.

All is changed utterly

Firstly apologies for the lack of updates, the impact of the emerging crisis left me somewhat at the eye of the storm, and though there was much to write about, the speed and scale of the events left me too busy to comment. In addition I was scheduled to make a keynote speech at the Lithuanian economic forum, and this left even less time to devote to commentary.

This is not to say that there has been nothing to talk about.

The complete capitulation of the near century-old Wall St. investment bank model was more sudden and more complete than anyone could have expected- even those of us that have warned that the US had been playing with fire for some time are still staggered by the scale of the collapse.

The after shocks- including the forced consolidation of the British banking market and the growing problems in the European banking market are likely to continue for some time.

We still can not put a number on the scale of the problem. Sufficient to point out, perhaps, that the proposed Pau…

Boom and Bluster

As the impact of the financial storm in the US sinks in, there may be some surprising losers. Not so much the "masters of the Universe", since they know full well that with high rewards come high risks, but some who arrogantly believed themselves immune to the storms of the financial markets.

Six weeks ago, Russia was basking in the warm economic climes caused by a massive surge in the price of oil and other commodities. Though their balance sheet was relatively small, they believed that the biggest problem that they had to face was the inflationary risks of so much money coming into their economy. The liquid reserves would allow them to weather any storm.

Since then we have seen the BP TNK mess underline the real risks that even one of the largest and most powerful global corporations face when dealing with the crooked and opaque business world of the Silovik state. We have seen aggressive comments by Vladimir Putin about the running of Mechel undermine confidence still furth…

Bournemouth days

The Liberal Democrats seem to be having a fairly harmonious conference. Alas, for the first time in several years, I will not be able to attend, since I have had to stay in Tallinn for the rest of the week.

It is particularly galling, since several of my friends who are somewhat irregular attenders will in fact be going.. ah well, there is always next year.

Creative Destruction

It has been one of the most dramatic weekends in finance that I can remember. The failure of Lehman Brothers and the shotgun marriage of Merill Lynch with Bank of America are seismic shifts in the world of money.

The fall of the House of Lehman ends a 158 year business overnight. Nearly 27,000 people- including several friends of mine- have lost their jobs. The merger of Merill could lead to even larger job cuts as the workforce of some 60,000 is slimmed down. It is hard not to feel sad when venerable institutions disappear.

Yet such is the nature of capitalism. I well remember at the time of the fall of Barings, walking past their offices- lights ablaze as the executives of the bank struggled with the developing crisis. In the end the losses of Barings- about £600 million look pretty minor compared with the scale of losses in the financial markets today. In those days my own office window overlooked the building that was being fitted out as new offices for Barings, and a poster was put…

What the F***?

After a phone call from the Russian Foreign Minister, Sergei Lavrov, to the British Foreign minister, David Milliband, that was reportedly a tirade of foul mouthed abuse, it still seems that Russia is not getting the message. The tasteless and wholly inaccurate comment from Dimitri Medvedev that "Georgia was Russia's 9/11" combines the usual sense of Russian arrogance and paranoid victimhood in one simple phrase.

Meanwhile Russian schoolchildren are being tought that Stalin was "a tough minded leader who took decisions in his country's best interest".

Actually, Mr. Putin, Stalin was a psychopathic murderer with the blood of millions on his hands, who entered into an alliance with Hitler that destroyed European peace. Almost entirely evil, by the end of his life he was essentially criminally insane.

I am back in Tallinn and the impact of the Georgian war is clear- the fear that Russia intends to destabilise Estonia and the other Baltic countries by picking furt…

Who will bury who?

The Russian "August War" is still rumbling on, despite the fading of Western media interest. Russian troops continue to hold their positions well inside Georgia proper, and continue to harass Western deliveries of aid to shattered Georgia.

However already, the Kremlin is starting to have to pay the price for their aggression.

The FT reports this morning that the Central Bank of Russia has been forced to intervene to support the Rouble. The Bank confirms this, suggesting outflows of around $ 5 billion, however more independent voices suggest that he outflows over the month were more in the region of $15-$20 billion.

It is, of course, not just the impact of the war- significant though that has been. The threats by Mr. Putin against Mechel, the announcement that grain trading was to be considered a "strategic" sector, the continued attacks against BP-TNK all have unsettled the markets substantially.

Now, the perception has hardened that the risk profile of Russia needs t…

America's future

All things considered, the storm around the Republican Party's choice of VP nominee should have been highly predictable.

Let's face it, John McCain is 72. Were he to serve two full terms, he would leave office aged 81.

Eight Presidents of the United States, not quite 1 in 5, have died in office.

It may seem ghoulish, but the fact is that there is a significant chance that whoever John McCain might have chosen, they could indeed be called upon to serve as the leader of the United States were- God forbid- anything to happen to John McCain himself.

Of course, that also applies to BarackObama, despite his being three decades younger than the Republican nominee. Although I do not particularly admire Senator Joe Biden, the fact is that in his thirty-five year service in the US Senate and in his own abortive runs for the Presidency, he has demonstrated his knowledge and indeed considerable influence in the American political system.

Sarah Palin has only been Governor of Alaska for three m…

Whom the Gods would destroy...

In the sunshine of the Croatian capital, my thoughts are drawn to the US Presidential race.

As the dust begins to settle on John McCain's choice of running mate, it is beginning to look an even more high risk bet than it initially appeared.

Mrs. Palin may be a full fledged member of the human race- teenage pregnancy and all- but her terrifying lack of experience and education makes Sen. McCain look frankly reckless.

All of the old fears about his maverick personality seem set to be concentrated on this extraordinary choice of running mate. Frankly it simply looks like tokenism of a very high order- but to make such a choice without having completed a full due dilligence is foolhardy in the extreme.

Sarah Palin may be the making or the breaking of the McCain Presidential bid- but if I was a Republican I would certainly be feeling very nervous.

If I was an American I would now regard Sen McCain as frankly too reckless to take the Oval office.